Fixing the US Postal Service's Finances

The battle over the U.S. Postal Service's "pre-funding" of future retiree health care benefits shows no signs of weakening.

Earlier this week, C-Suite Insider obtained a memorandum between the Congressional Research Service and House Oversight Chairman Darryl Issa (R-CA) which said the USPS was not obligated to pay for retiree health care benefits of future workers, even though it could be interpreted that way. But the memorandum is not changing the opinion of the National Association of Letter Carriers. (Ed. Note: See below)

I caught up with Fredric Rolando, President of the 300,000 member association, asking him if Congress did indeed create the USPS fiscal crisis.

FR: Yes, that’s precisely what it did. The congressional notion was that the Postal Service was making lots of money selling its products and services, and so it might be a good idea to put those profits into pre-funding future retiree health care benefits for the next 75 years and do so in a decade. No one else, public or private, does this – but it would put the Postal Service that much more ahead of the game in terms of future liabilities. And so, in 2006, Congress mandated that the USPS do so, at a price tag of about $5.5 billion a year.

The problem is that shortly after that was put into effect in 2007, the economy started to enter the worst recession in 80 years. Businesses were hurt, unemployment rose, and as a result mail volume dipped.

Despite all that, the Postal Service has performed well, achieving $611 million in net operational profits delivering the mail over the four fiscal years since 2007, in part through increased worker productivity and close management-labor cooperation. On-time delivery and customer satisfaction are at record levels. But because of the recession, the profits were not enough to pay for the $21 billion cost of pre-funding over that period. And so, the Postal Service had to dip into its profits, its savings and its borrowing authority.

Any private company would have said that this was a noble idea, to try to do something no one else does – pre-fund these benefits 75 years out – but let’s revisit the idea when the recession ends, the economy returns to normal, and profits are sufficient to do this. But because of the congressional mandate, the USPS didn’t have that option.

And so, when people read about the $20 billion in red ink over the four fiscal years since 2007, it’s important to keep in mind that it does not stem from the delivery of mail, but rather from this external—and unique—mandate that Congress imposed. This mandate accounts for all – and then some—of the red ink over that period.

LL: So to make this as simple as possible. The U.S. Postal Service is paying for the future retiree health care benefits of workers who have yet to work for the Postal System? In fact, are you saying many of these future workers are just out of diapers?

FR: Yes, and it goes beyond that. Many of them aren’t even born yet. And keep in mind that not only doesn’t any OTHER public agency do this, even those private companies that are highly profitable and opt to pre-fund future retiree health care benefits do so at a much lower level than the Postal Service. Essentially, the USPS has been brought into an artificial financial crisis by being forced to do something that no one else does. And keep in mind that the USPS already was in good shape as far as future liabilities, whether future retiree health care benefits or pensions – so this wasn’t an attempt to correct a problem. It was, rather, intended as icing on the cake – and it’s nonsensical to push an agency to the brink over that.

LL: You've read the CRS memo which C-Suite Insider exclusively obtained. What do you think of their conclusion?

FR:The CRS memo, a complex look at public and private sector funding of retiree health benefits, notes that the Office of Inspector General of the USPS concludes that estimates of its future retiree health liabilities are too high and that under the present payment system, by 2016 the USPS "will have over-funded its retiree health liability." Without getting into the weeds, one thing is clear—no other organization in America is compelled to pre-fund future retiree health benefits at the level done by the USPS.

That statement of fact is underlined by the CRS report itself, which states that "funding of retiree health benefits is not mandatory in the private sector."

It is clear that pushing a public agency, that operates with no taxpayer funds, to the brink of financial crisis by forcing it to assume a financial burden assumed by no other agency or company is the height of financial irresponsibility—and Congress should fix the problem it created

LL: There have been several bills on the Hill on USPS reform. Which bill do you think has the necessary ingredients in place to put the USPS back on track?

FR: There are two bills that make sense as a starting point for reform: H.R. 1351 in the House and portions of S. 1010 in the Senate. Neither would relieve the USPS of the unique pre-funding burden it has been compelled to assume, nor—and this is important—would either use taxpayer funds to meet it. (It's important to note that the USPS hasn't used taxpayer funds for 30 years).

Rather, both would direct the OPM to implement the findings of two independent, private-sector audits done in 2010 for the Postal Regulatory Commission and the USPS OIG (the Hay and Segal Co. audits) and transfer surplus pension funds in the postal portion of the CSRS to the PSRHBF. These bills would stabilize the Postal Service and allow it to adapt to society's evolving use of the mail. Rep. Issa is backing the government auditors at GAO who support the OPM's methods for valuing the Postal Service's CSRS balance, even though those 1970s-era methods are outdated—employing static valuation methods instead of modern dynamic methods.

LL: : Which bill do you think is off-track and would send the USPS down the wrong path?

FR: The Issa bill is a bureaucratic, top-down approach that will reduce services to taxpayers, begin the destruction of the Postal Service, and more broadly do serious damage to the $1.3 trillion mailing industry that is built around the USPS—thereby threatening the industry's 8 million private-sector jobs.

These people are employed in the printing, publishing, banking, direct marketing, online commerce and PBM sectors.

The absurdity here is that massive downsizing to meet an unrealistic—and wholly unnecessarily aggressive—pre-funding schedule would jeopardize so many jobs while needlessly damaging a vital infrastructure service for many thousands of American businesses. Surely Congress can do better than that. A rational, bi-partisan solution that targets the actual problems is what is necessary—as most legislators realize.

LL: But Chairman Issa says the USPS should pay for these benefits and in order to be self-sustaining"prefunding is a prudent measure to protect employee's earned benefits and taxpayer money". Are you saying prefunding is not necessary for the USPS to ensure that these benefits are covered?

FR: We have never said that we oppose pre-funding. But a uniquely high level of pre-funding shouldn't be obligated during a recession if it strips a company of its operating funds. Whom does that serve?

The Postal Service should be able to do it the way private companies do it, by re-directing pension surpluses and/or contributing once the economy recovers and the USPS returns to profitability. Keep in mind that the Postal Service's future obligations -- whether retiree health care benefits or pensions—already are in far better shape than those of almost any other company in America.

For example, we have set aside $42 billion in health care benefits so far, enough to cover all current retirees for the rest of their lives. Congress should either give us a fair shake on the CSRS and let us meet our obligations by using those surplus pension funds, or it should suspend the pre-funding burden until the Postal Service's finances are stabilized.

It is utterly unfair and counter-productive to expect the Postal Service to produce its own revenue—which it does—and yet not allow it to use the money it generates in the most effective and businesslike manner it can, as all other companies do. One has to wonder what Rep. Issa's real agenda here is.

LL: Both sides have been accused of fear tactics to get across their points. Do you feel Congressmen like Chairman Issa is using fear tactics?

FR: The unions have not used fear tactics; we have been providing our members with facts about the actual financial situation at the U.S. Postal Service, including that it is the only agency or company in America that is required to pre-fund future retiree health care benefits. In the private sector, pre-funding is voluntary.

According to an annual survey of Fortune 1000 companies, two-thirds don't pre-fund. The one-third who pre-fund future retiree health benefits at all do so at an average of 30 percent. The USPS, by congressional mandate, has to do so at nearly twice that level.

Other federal agencies—including the Congress, the GAO and the OPM—don't pre-fund at all. And yet, Congress adopted a fixed, inflexible and accelerated schedule of pre-funding payments in 2006 that forced only the USPS to pre-fund—mandating that more $55 billion be put into the PSRHBF in 10 years' time, whether the USPS was profitable or not. Even after the worst recession in 80 years hit, Congress refused to alter the schedule. The $21 billion in pre-funding payments accounted for 100 percent of the Postal Service's red ink ($20 billion) in the four fiscal years after 2007.

Rep. Issa is not using fear tactics; he's simply saying he thinks this onerous schedule should stand and that reducing the pre-funding burden is tantamount to a taxpayer bailout. He's wrong on this, and we aren't the only ones who say that. He's at odds with Postal Service management, the federal watchdog Postal Regulatory Commission, the postal Office of Inspector General, and the various Republican and Democratic representatives and senators who've filed legislation that—unlike Rep. Issa's bill—addresses this critical issue.

In fact, Rep. Issa is even arguing with himself—back in 2009, he supported reducting the pre-funding payment from $5.4 billion to $1.4 billion. I don't think he would have taken that position had he considered this a bailout.

LL: What is your message to Rep. Issa whose plan does not include eliminating this requirement?

FR: Please get off your ideological campaign to attack government, public employees and middle-class jobs, and instead take your oath of office and your duties as committee chairman seriously, look at the facts here, and then act responsibly. You say you support businesses and jobs, national security and veterans – so it would be a good idea for you to examine how much your bill would hurt each of these groups or goals.

Remember, your postal “destruction” act has one co-sponsor besides yourself. Conversely, H.R. 1351, from Rep. Stephen Lynch, which addresses the pre-funding issue, has more than 220 co-sponsors – a majority of the Congress – including dozens of Republicans. Why won’t you let that bill come up for consideration?

LL: Rep. Thomas Davis (R-VA) Sponsored this bill and it was passed by Congress by a voice vote in the house 12/8/2006. Now Rep. Stephen Lynch is trying to transfer this strategy. What is your message to Congress?

FR: Our message is that Congress should act responsibly and correct the problem it created. Its intentions may have been good but the results have been disastrous. Congress should address the elephant that it brought into the room.

It should act based on the facts – not on misinformation about the Postal Service’s finances, and not because of the ideological mission of a few members who seek to destroy government, public service and middle-class jobs. H.R. 1351, the Lynch resolution you referred to, moves us in the direction of fixing the problem, and it’s in the national interest to pass it. It already has majority support within the House in the form of co-sponsors, including dozens of Republicans.

LL: If this mandate was reversed, how long would it take for the Postal Service to be solvent again?

FR: Without this unrealistic mandate, the Postal Service today would have cash in the bank, its borrowing authority intact, and a modest but impressive profit – and these conversations wouldn’t be occurring in the first place. Looking forward, if the biggest single drain on the postal budget were fixed, then all the players – the USPS, employees, legislators, Postal Regulatory Commission, the mailing industry and others – could address questions of how to grow the business, where to improve efficiency, and so on. This latter – which involves seeing where savings can be achieved – has to be done in a rational, thoughtful manner, taking into account how much of the mail comes back as the recession recedes. It can’t be done in the current panic mode engendered by the artificial financial crisis Congress created.

LL: If you took this out of the balance sheet, how much would the Postal Service revenues be?

FR: As stated, profits in the four fiscal years since 2007 would have been $611 million, as opposed to $20 billion of red ink. Equally important, attention could be focused on adding needed services, better meeting the needs of residents and businesses, and adapting to the future, as opposed to the absurd scramble to find money in the midst of a recession to pay pre-funding costs no one else has to – which has for years diverted management’s attention and energy from building a vision for the future, as it should be doing.

LL: How many jobs will be lost if Saturday delivery is cancelled?

FR: The Postal Service says about 50,000. And that’s just letter carriers. More broadly, when you start dismantling the Postal Service – and this would be a major step in that direction – you’re putting in jeopardy the overall mailing industry of which the Postal Service is the centerpiece. There, you’re talking about a $1.3 trillion industry that supports about 8 million American jobs in the private sector.

LL: And that's on top of the closing of post offices. So what's the total amount of postal jobs will be lost?

FR: The Postal Service says that its proposed changes would eliminate 220,000 postal jobs, including 100,000 by attrition. There are several key points to make here.

First, this would deprive residents and businesses of essential services.

Second, it would involve the destruction of a 200-year-old national treasure that provides Americans with the most-efficient and least-expensive delivery service in the industrial world.

In the communications age, the nation’s only truly universal communications and delivery network should be beefed up, not destroyed.

Third, it would add to joblessness and unemployment rolls at the worst possible time, both among postal employees as well as private-sector workers whose jobs depend on the Postal Service.

Fourth, it would not save the taxpayers a dime, because postal salaries and other expenses are paid from postal revenue derived from the sale of products and services.

The Postal Service hasn’t been budgeted a dime of taxpayer money in almost 30 years. In fact, these mass firings and reductions in service would cost taxpayers large amounts of money. Not only would they be on the hook for an increase in unemployment benefits, residents and businesses would also face higher mailing costs as they’re forced to turn to private carriers to fill the vacuum. In short, these moves to slash jobs and services would damage the economy and our country – and for no good reason.

LL: If reversed, should the money already allocated stay in the pre-funding account?

FR: The $21 billion should properly be returned to the Postal Service’s operating funds. The USPS should not be held to a different standard than every other public agency and private company, and returning the money to the operating budget – which has been so needlessly depleted – would only be fair.

It’s important to remember that this money has nothing to do with taxpayers; it is earned revenue from the sale of stamps and services. It’s also worth noting that the future retiree health care benefits for the USPS would remain better funded than those of any other employer.

LL: What do you say to those in the press who say the U.S. Postal system is past the times and can not compete with FedEx, UPS and online bill paying?

FR: This is false, for several reasons. First, adapting to an evolving society and to technological change is nothing new; the Postal Service has been doing this for 200 years, including to the telephone, telegraph and fax machines, and each time emerging with stronger products and services that meet the needs of residents and businesses.

Second, the Internet clearly presents challenges, such as more people paying bills on line, but it also offers opportunities, with more people ordering things on line that need to be delivered. Doing last-mile delivery for UPS and FedEx is a growing profit-maker for the Postal Service, which can do it less expensively because of our universal delivery network that goes to 150 million addresses six days a week. This benefits the private carriers and their customers, as well as the USPS.

This, by the way, drives home just how counter-productive the bid by a few in Congress – and even by USPS management – to eliminate Saturday service is. The best day to deliver packages is when people are home – and that’s Saturday.

Stopping Saturday delivery would save 2 percent of the USPS budget by sacrificing 17 percent of the service – a formula no rational business would adopt. It would disproportionately affect rural communities, folks who need medicines on a weekend, and small businesses. Moreover, it would hurt future revenue and growth potential by compromising the delivery of packages – all these trade-offs to save 2 percent of the budget. If there were a picture next to the word “counter-productive” in the dictionary, this would be a good choice.

Third, the universal network is a critical element of our society and our economy. We bind this vast country together, connecting rural and urban communities and all residents and businesses, carrying out our duty – embedded in the Constitution – to deliver universal service.

Try asking a private carrier to send a letter from Miami to Anchorage for 44 cents. We provide the industrial world’s most efficient and least-expensive mail service, despite the huge size of our country, even as we deliver 40 percent of the world’s mail.

In addition, the USPS is the centerpiece of a $1.3 trillion U.S. mailing industry that directly supports between 8 and 9 million American jobs. And we’re critical to small businesses that do financial transactions on the weekend, and that create two-thirds of all new jobs, and which by the way depend on Saturday mail delivery to do their weekend financial transactions. Degrade the USPS and you’re threatening existing jobs and future jobs – for no reason other than misinformation or ideology.

And it’s important to consider that the USPS has benefits that extend well beyond the economic. Just one example: When President George W. Bush wanted to set up a mechanism for delivering medicines to Americans in the event of a biological incident, he turned – where else – to the Postal Service.

Letter carriers volunteered to set up a pilot program in Minneapolis, in which they stockpile medicines at their home to deliver to residents in case of need. A second pilot program was set up in Louisville. Just within the past few months, Boston, San Diego and Philadelphia were added. What would it cost to set up a network or agency to do that? Letter carriers also act as the eyes and ears of communities throughout the country, on a weekly basis saving elderly residents who’ve taken ill, finding lost children, stopping crime or putting out fires.

They do this not because they are supermen but because they have the privilege of serving their customers every day, become part of those communities, know when something’s wrong and typically are the first on the scene. In many instances they are able to respond effectively because of their military training; about one-quarter of letter carriers are veterans.

It would be a national travesty to dismantle such a unique and valuable network when the financial problems stem from an artificial and external burden Congress created – and which Congress could readily fix at zero cost to the taxpayer.

LL: How many total jobs will be lost if this is not reversed?

FR: Hundreds of thousands within the USPS itself, and many more within the broader mailing industry – at a time when we already suffer from massive unemployment. Losing these jobs won’t save taxpayers a penny, and, again, would in fact cost them great sums of money in terms of unemployment benefits and other costs.

LL: The US Postal Service is the only agency being required to do this. Why?

FR: There is no good answer to this. It should not be the only agency or company forced to function under this onerous burden.

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Ed. Note:Earlier headlines on this story mischaracterized its content and have been changed.

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."